After a fall in stock prices, insurance sector shares are now offering a better risk-reward setup, according to analysts at global brokerage and research firm Morgan Stanley. “The VNB CAGR for our covered life insurers is likely to be 12-28% for FY20-22, marked by the pandemic and retail protection slowdown. Thus, life insurers have shown the ability to adapt and grow through a tough phase. Economy is likely to improve,” said Morgan Stanley in a note. The brokerage firm has upgraded HDFC Life shares to overweight and PB Fintech too while reiterating their bullish bias for SBI Life.
Insurance sector offers opportunity
The insurance sector has been dubbed as the most preferred space by analysts at Morgan Stanley even though the sector stocks have underperformed bank stocks and even benchmark BSE Sensex so far in 2022. SBI Life Insurance, HDFC Life Insurance, and ICICI General Insurance are trading with losses on a year-to-date basis. Some analysts have pinned the blame of this underperformance on the upcoming LIC IPO.
However, Morgan Stanley believes the sell-off has created a significant alpha opportunity. “We view Indian private life insurers’ fundamentals as solid and believe the resilient VNB and EV growth demonstrated through the last two years of the pandemic is under-appreciated by investors,” they added. The brokerage firm also added that any argument about significant disruption to private sector growth with LIC IPO incoming is in the realm of conjecture.
SBI Life Insurance Company: Top stock pick
Target price: Rs 1,450 per share
SBI Life is the largest private-sector life insurer in India and has been gaining market share within both the private sector and the market overall over the years. Morgan Stanley said that SBI Life has the lowest cost structure in the entire industry, lower than LIC of India. “valuation metrics – one year forward P/EV and P/VNB – look attractive,” they added. The stock currently trades at Rs 1,105 per share, translating to an upside of 31%.
HDFC Life Insurance Company: Upgraded to Overweight
Target price: Rs 675
HDFC Life stock has been upgraded to overweight from the underweight category by Morgan Stanley. “Historically, the key concern has been its premium valuation. Valuation looks attractive following a recent sharp correction and underperformance over the past two years,” analysts said. “We have moderated our APE growth forecasts for F22 and F23 to 16% / 18% from 18% / 20% given recent weakness in January and February as well as the rising macro risks,” they added. So far this year the stock is down 14% to now trade at Rs 555 per share, suggesting an upside of 21%.
PB Fintech: Upgraded
Target price: Rs 945
“We have liked PB Fintech’s business model given its large and growing TAM, strong customer proposition, dominant market share and a clear path to profitability. However, volatility in fintech stocks globally and limited upside to our target price kept us EW,” Morgan Stanley said. They added that the recent fall in the stock price along with the settling down of volatility in fintech players marks a good entry point into the stock. The price target implies an upside of 22%.